The Long and Short
Boeing picks up momentum
Dan Bruzzo, CFA | January 27, 2023
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Strong earnings, good free cash flow, momentum on debt reduction and an improving tone at rating agencies have helped spreads on Boeing debt tighten faster than the broader investment grade market. But a tremendous backlog of future business looks like the most compelling indicator of Boeing’s prospects in the long run. The company’s debt remains a good relative value.
Boeing (BA: Baa2/BBB-/BBB-) reported fourth quarter and full-year results this week, with perhaps the best indicators yet that the aircraft manufacturer is on a clearer path to recovery after several years of operating and regulatory turbulence. Most notably, BA recorded positive free cash flow of $2.3 billion for the year on operating cash flow of $3.5 billion, exceeding its recently increased estimate for $1.5 billion to $2.0 billion provided just last quarter. Management maintained its estimate for $3.0 to $5.0 billion in free cash flow for 2023.
Back in my December lessons learned edition for 2022, I highlighted the company as one of the better performing, high-beta credits in the industrial space since spring and a continuing opportunity for bond investors to outperform peers in the rest of the segment. Since then, spreads have moved sharply tighter, outpacing the vast improvement in the broader investment grade market month-to-date. Boeing 5-year CDS spreads have tightened to less than 98 bp from 147 bp in the third week of December, for a move of about 33%. Comparatively, the investment grade index moved to 119 bp from 135 bp over that same period, or about a 12% move in a little over a month.
Exhibit 1. Boeing credit curve versus IG aerospace and defense peers
BA reported fourth quarter total revenue of $20.0 billion, which was effectively in-line with expectations, and brought the full-year total to $66.6 billion. Free cash flow for the quarter was $3.13 billion, which exceeded the consensus forecast and kept the company on track to exceed recently revised full-year estimates. The commercial division delivered 152 aircraft in the quarter, generating $9.2 billion in revenue, which was a 54% increase over the prior year. Defense, space and security delivered 45 aircraft plus three satellites for revenue of $6.2 billion, which was up 5% year-over-year. BA booked a $1.75 per share loss in the fourth quarter ($663 million), which improved markedly from the $7.69 per share loss recorded in the prior year quarter ($4.2 billion).
Exhibit 2. Boeing 5-year CDS spreads versus the broad IG index OAS
Standard & Poor’s commented favorably on BA’s fourth quarter earnings results, highlighting that cash flows for the year came in better than anticipated. The rating agency noted that the aircraft manufacturer had not taken any large, material charges throughout the year, which helped enable BA to produce positive free cash flow for the first time since 2018. While S&P fell short of moving the outlook on its ‘BBB-‘ rating to stable from negative, they stated that they will be willing to do so next year with sustained improvement, and the positive commentary appears to be the best indicator yet that the rating agencies are acknowledging the improvement demonstrated by company.
Management appears poised to make good on debt reduction goals as we enter the new year. BA’s projections for $3 billion to $5 billion in free cash flow for 2023 should be nearly enough to meet the $5.1 billion in public debt maturities for the year. The company has over $17 billion in cash and equivalents on the balance sheet, with an additional $5.8 revolver through this year, plus another $3.2 billion revolver through next year, and a third $3.0 billion revolver through 2025.
What remains the most compelling long-term indicator of Boeing’s outlook is the company’s tremendous backlog of future business. The total backlog increased to $403 billion in the fourth quarter from $381 billion in the previous quarter. The backlog in commercial airplanes increased to $330 billion from $307 billion sequentially as the company booked net orders of 376 aircraft in the quarter. The backlog underpins the company’s longer-term projections to achieve annual free cash flow closer to $10 billion by 2025-2026 and begin significantly reducing the company’s debt burden to help bolster debt ratings.
Dan Bruzzo, CFA
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